(The Canadian Press circulated the following on October 26.)
MONTREAL — While Canada’s railroads are being battered by higher currency and fuel prices, the weakened forest products sector is expected to hammer the country’s largest railway, CN Rail (TSX:CNR), more than Calgary-based CP Rail (TSX:CP), industry analysts say.
“CP doesn’t have the same level of exposure to forest products, and that’s definitely been the weak spot for CN,” Ryan Crowther of Salman Partners said in an interview.
Less than 10 per cent of CP’s freight revenues come from the forestry sector, compared to about 22 per cent for CN, Crowther said. The western based hauler focuses more on transporting grain, chemicals and coal.
“It’s a double whammy because you get hit by the dollar when you translate earnings and then you get hit by the dollar through those secondary factors like the dollar’s impact on the forest industry.”
CP will report its third-quarter results Oct. 30.
Analysts polled by Thomson Financial expect on average CP’s quarterly earnings per share will increase by 12 per cent.
On Monday, CN reported its results, which were modestly below expectations. It earned 93 cents per share, excluding three-cent favourable tax benefits. That’s down one per cent from the same period in 2006.
Ongoing pressures and uncertainty prompted the company to revise its growth guidance for the year. Earnings are now expected to be flat, instead of growing by five-per-cent when excluding one-time gains from the sale of its Montreal Central Station complex and its stake in English Welsh and Scottish Railway.
Uncertainty about the economy prompted CN to delay its 2008 guidance by several months until early 2008.
“The reality is that it’s tough to call the economy,” Claude Mongeau, the chief financial officer, told analysts on Monday.
Despite being hurt by lower forest products volume, CN is enjoying strong shipment of petroleum, chemicals, coal, grain and fertilizer.
Pricing gains have prevented revenues from falling further, said Crowther.
“We expect they’ll get solid pricing increases next year,” Crowther said.
“When they have the foreign exchange working against them it ends up that some of those pricing gains get sucked up and offset by other things.”
UBS analyst Fadi Chamoun said CN’s “robust pricing fundamentals” should allow it to “partially recover the negative effect of foreign exchange while housing related volumes should rebound from what is currently estimated to be 20 to 30 per cent below trend levels.”
CN shares lost $1.62 or 3.14 per cent to $50 in trading Tuesday on the Toronto Exchange.
Company shares trade at a three per cent discount compared to its peers and an eight per cent discount to the overall market despite industry-leading returns, strong balance sheet and free cash flow, Chamoun wrote Tuesday in a report.
“We expect the company’s reasonable valuation and recovering EPS growth in the coming quarters, supported by pricing growth, strong bulk volumes, contribution from Prince Rupert and share repurchase, to underpin share price performance.”
The first shipment arrives next week to the railway’s port in Prince Rupert. The facility will contribute to growth, but will only add $100 million in its first year, or one per cent of overall revenues.
It also expects to benefit longer term from the pending purchase of Elgin Joliet and Eastern Railway Co., which will speed delivery times by avoiding the busy Chicago hub.